This is a short coaching session on “Hindsight Bias”. This little parasite can rob many otherwise prudent investors of their peace of mind. We all do it ourselves and need to see it when it pops into our thoughts and conversations.

Here is how it enters our thinking. You tell yourself the following:

“When the market peaked in October of 2007, I thought we were due for a decline and I was right.”

“I knew the stimulus plan was not going to help and I was right.”

“If I had acted on what I knew I would have saved a lot of money.”

“Next time I am just going to pull out when I know what’s going to happen.”

This is the progression of thought we fall into. The problem: none of it is true!

First, we are never absolutely certain before something happens. We only become certain afterward.

Second, there are thousands of instances that we thought something that did not happen. We don’t remember all the times that we are wrong. We don’t include the wrong decisions in our total investment returns. It would be help our objectivity if we could balance when we are right with all the times we are wrong.

Finally, the progression of thoughts above is rooted in emotions, not in historical truth. The truth does not change. Hindsight is incomplete and often lies to us.